Is buying a house the good investment it once was? Why some choose to build wealth as lifelong renters instead

“Unless you have family help or a dual income, it’s very difficult to get into the real estate market,” says Toronto real estate agent Tom Storey.

And because homeownership has been so profitable over the past few generations, there are expectations that ‘everyone should do it’ and ‘you’d be crazy not to,’ says personal finance expert. Preet Banerjee.

But in today’s market, it’s not so clear what the best approach is, he says.

It’s true that generations of Canadians have had success investing in real estate or preparing for retirement with home ownership, but the changing landscape now The question arises: rent or own?

Renting and owning each have their positives and negatives, but some experts say renting for life can be worth it in the long run.

Storey notes that home prices are high, and “based on the information we have before us now” they are unlikely to rise at the rate they have in recent years.

There are a few reasons for this, he explains: interest rates have risen from their historic lows, population growth has fallen due to tightened immigration policies, and there is a ban on foreign buyers, which is reducing demand and driving down house prices.

That means people hoping to make a profit buying and selling real estate could be disappointed.

Additionally, due to higher interest rates, some landlords may not be able to charge rents high enough to cover their higher mortgage costs.

For Francine Dick, financial advisor and author of “Enjoy Your Latte,” a house is first and foremost a home.

“People who buy a house as an investment can get into a lot of trouble, as we are seeing now,” she says.

A big reason why someone chooses to own a home, even if they don’t see it as an investment, is the security and stability it brings, Dick says.

Renting carries the risk of eviction, even if you have done nothing wrong as a tenant. For example, someone renting an apartment may be forced to leave if the owner wants to move in. (Someone living in a purpose-built rental apartment doesn’t have to worry about that, though, Dick notes.)

Storey adds that tenants – especially those whose landlords are large corporations – will likely face annual rent increases, and since anything built after November 2018 in Ontario is not subject to rent control, the increases could be high.

“They won’t forget that after a year they can increase your rent,” he says.

On the other hand, Dick says, someone may prefer “the freedom of renting” if he or she likes to travel and doesn’t want to worry about maintaining a home, or if he or she wants to be able to “pick up and go” for a job.

That’s certainly the case for Banerjee, a lifelong renter who recently moved to Britain after living in Toronto for about a decade.

Renting allows for more labor mobility, while homeowners are less likely to move, he says.

Moreover, given Banerjee’s busy schedule and his aversion to maintaining his home, “it’s a fantastic idea to make just one payment and not have to worry about anything else,” he says.

There are several costs associated with owning a home: a down payment, monthly payments, property taxes, home insurance, repairs and maintenance costs, if you live in a condo.

“One of the many reasons people like to buy regardless of the asset’s growth is that it’s essentially a forced savings plan,” says Storey.

The mortgage payment is split into two categories – principal and interest – and as you pay it off, “a certain percentage essentially goes into your own pocket, or into your equity or assets,” he says.

When renting, none of the money goes back to you; it just goes to your landlord, he says.

However, Banerjee notes that “when it comes to homeownership, you’re renting money, so you’re still a renter even if you’re a homeowner until you actually pay off that house.”

A few years ago, some people had such high interest rates that “their mortgage payments didn’t even cover the principal — it just covered the interest,” Banerjee says, and “it was a much higher obligation than they bargained for.”

Dick adds that paying off a mortgage “frees up a lot of cash flow,” but there are still other costs left over, such as property taxes, utility bills and maintenance costs.

Homeowners can also spend money on renovations — “both necessary and desired” — which can come with hefty, sometimes unexpected bills, she says.

Additionally, Dick says she sees many people retiring with a large mortgage, in which case “you should think of your mortgage as rent.”

Given the many costs associated with owning a home, owning a home is more expensive on average per month than renting, Storey says.

To determine whether renting or owning is better for you, Banerjee suggests using a framework—which he attributes to personal finance blogger John Robertson—in which you imagine two identical houses next to each other, but one of which is for sale and the other for rent.

The house for sale costs $1 million, while the house for rent costs one dollar per month. In this scenario, “it is clear to everyone that it would make more sense to rent.”

However, if the rental house cost $1 million to rent, “it’s clear” you would buy the house next door for $1 million.

“If you agree with these two scenarios, then you implicitly agree that there is an intersection at which the price-to-rent ratio makes renting more attractive, or home ownership more attractive,” says Banerjee.

In some markets, homeownership is the obvious answer, but in others, like Toronto, it’s not so clear, he says.

While some see renting – where all the money goes to the landlord – as a “sunk cost,” Dick says she disagrees because “people have to live somewhere” and renters have more freedom than owners.

Mortgage payments tend to be higher than rents, and someone who has the “financial discipline” to invest regularly while renting could be in a good position financially, Storey says.

For example, someone who can afford to buy but chooses to rent may have “a bigger advantage” if they invest the difference between the cost of renting and the cost of owning, he says.

“It has been clear to most Canadians over the past 30 years that buying has put them in a good position because of the growth of the asset,” says Storey. But “if asset prices don’t rise,” that money might yield better returns in the stock market.

Dick adds that if a renter were to invest the money a homeowner would spend on renovations — say $50,000 on a bathroom — into an RRSP or TFSA, “you can build on that and build that money up to support you in retirement.”

Banerjee says that when he moved into his Toronto apartment years ago, the difference between rent and mortgage for an apartment was so great that it was a “no-brainer” that he would have to rent while investing in the stock market.

“I’m an example of how it can even work in a market like Toronto, where housing has done so well in that time,” he says. “The stock markets also did quite well.”

To make lifelong renting profitable, it is important to “invest wisely over a long period of time,” says Banerjee.